2025 (11) TMI 610 - AT - SEBI

Penalty under s.15I set aside for failure to prove coordination; s.12A and Regulations 3 and 4 PFUTP violations unsustained

Sanjeev Kalra, R.K. Sharma Son HUF, Sangeeta Sharma, Dhruv Sharma, Mohit Kalra Versus Securities and Exchange Board of India, Mumbai

SAT (LB) set aside the penalty imposed under s.15I, holding that the regulator failed to prove coordination between the appellant group and ... Imposition of a penalty u/s 15-I - artificial/fictitious volumes and gave false and misleading appearance of trade in the scrip - trades shows a meeting of minds between the buyers and the Appellants - violation of the provisions of Section 12A(a), (b) and (c) of the SEBI Act and Regulations 3(a), (b), (c) and (d), Regulation 4(1) and 4(2)(a) of PFUTP Regulations - HELD THAT:- In our opinion, as the Respondents failed to establish any connection between the Group 1 entities (appellants) and the Group 2 entities (counter-parties) and the fact that the Appellants have traded only on 2 days in the entire IP at market price, a conclusion of manipulative and fraudulent strategy to manipulate the volume of otherwise illiquid scrip of ESL cannot be reached. We also note that the counter-parties (Group 1) entities bought and sold shares in all three patches during the IP. The Appellants sold their entire shareholding in ESL in Patch 1 of the IP. They were, at the best, disposing off shares when they found movement in the shares of the scrip and in our view, this action on their part cannot be held to be violative of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations. Consequently, the impugned order cannot be sustained and is quashed qua the appellant. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the trading conduct of the appellants constituted creation of artificial/fictitious volume and a false or misleading appearance of trading in the scrip, thereby violating Section 12A(a), (b), (c) of the SEBI Act and Regulations 3(a)-(d), 4(1) and 4(2)(a) of the PFUTP Regulations. 2. Whether a finding of 'meeting of minds' and concerted manipulative strategy can be drawn from the trading pattern alone where no direct connection between appellant sellers and counter-party buyers was established. 3. Whether execution of trades on an anonymous screen-based exchange at prevailing market prices, in limited instances (two trading days) and involving disposal of existing holdings, suffices to sustain an inference of market manipulation and attract monetary penalty under Section 15HA (15-I referenced) of the SEBI Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the appellants' trading constituted artificial/fictitious volume and false or misleading appearance of trading in breach of statutory provisions Legal framework: The prohibition under Section 12A(a)-(c) of the SEBI Act and Regulations 3(a)-(d), 4(1) and 4(2)(a) of the PFUTP Regulations proscribes manipulative or deceptive devices, creation of false/misleading appearance of trading and any act that operates as a fraud on the securities market. Precedent treatment: The impugned order relied on principles that trading patterns demonstrating orchestration can amount to manipulation. The Tribunal's decision did not invoke or overrule any specific prior authority; it evaluated the statutory framework and facts of the case. Interpretation and reasoning: The Tribunal examined the volume surge in the investigation period, the appellants' shareholdings and sales (entire holdings sold on two specific dates), and the timing and pricing of trades. Critical to the analysis was absence of any established connection between the appellants and their counter-parties, absence of allegation of price manipulation, and that trades were effected at market prices on an anonymous screen-based platform. The Tribunal found that the appellants' conduct-selling entire holdings on two dates at market prices-was consistent with disposition of shares in response to market movement rather than participation in an orchestrated scheme to create artificial volume. The AO's attempt to infer a common manipulative strategy was not supported by proof of inter-party connection or other indicia sufficient to conclude artificial/fictitious trading by the appellants. Ratio vs. Obiter: Ratio - A finding of artificial/fictitious volume and rendering a false or misleading appearance of trading requires demonstrable connection or sufficient independent indicia of orchestration beyond coincident timing and execution on an anonymous exchange; mere sale of existing holdings across limited occasions at market price is insufficient. Obiter - Observations on broader market-volume increases and the conduct of other groups were noted but did not form the decisive basis to penalize the appellants. Conclusion: The Tribunal concluded that the evidence did not establish that the appellants created artificial/fictitious volume or a false or misleading appearance of trading such that Sections 12A and relevant PFUTP Regulations were breached; the impugned order could not be sustained against the appellants on this issue. Issue 2 - Whether trading-pattern evidence alone can establish a 'meeting of minds' absent proof of connection between sellers and buyers Legal framework: Establishing concerted manipulation ordinarily requires proof of agreement, coordination, or inferable meeting of minds; trading pattern evidence may contribute to such inference but must be assessed against other corroborative factors (e.g., communications, shared identifiers, inter-se transactions, price impact). Precedent treatment: The Tribunal applied the principle that trading patterns can be indicative but are not conclusive without corroborative connections. No authority was overruled; the decision emphasizes evidentiary sufficiency. Interpretation and reasoning: The AO relied on temporal proximity of orders and matched trades to infer coordination between two groups. The Tribunal observed that though the appellants were inter-connected among themselves, the AO failed to establish any connection between the appellants and their counter-party buyers. The Tribunal gave weight to (a) absence of allegations of inter-se trades within the counter-party group, (b) lack of proven links (communications or shared identifiers) between the two groups, and (c) the appellants' limited trading activity confined to two days. The Tribunal held that temporal matching on an anonymous screen-based platform, without other indicia of coordination or linkage, does not satisfactorily demonstrate a meeting of minds sufficient to establish manipulative conspiracy. Ratio vs. Obiter: Ratio - A finding of meeting of minds cannot rest on trading-pattern coincidence alone where the regulator fails to establish inter-party connections or other corroborative evidence indicating coordination. Obiter - Remarks that trading-pattern analysis remains a relevant tool for regulators when supported by additional evidence. Conclusion: The Tribunal concluded that the AO's reliance solely on trading pattern to infer a meeting of minds between the appellants and counter-party entities was unsustainable; absence of proven connection negated the inference of a concerted manipulative strategy. Issue 3 - Whether anonymous screen-based execution at market price and limited-volume trades justify penalty under the SEBI Act Legal framework: Enforcement under Section 15HA/15-I of the SEBI Act (monetary penalties) requires demonstration of statutory contraventions (e.g., PFUTP Regulations). The nature of the trading venue (anonymous screen) and execution at prevailing market price are relevant to assessing manipulative intent and market impact. Precedent treatment: The Tribunal reaffirmed that anonymity of exchange mechanism does not ipso facto validate or vitiate trades; the determinative factor is whether the statutory elements of manipulation are proved on the facts. Interpretation and reasoning: The Tribunal accepted that anonymous platform execution does not shield trades from scrutiny, but held that where trades are executed at market prices, involve disposal of previously acquired holdings, occur on only two days, and lack demonstrated coordination with counterparties, the necessary elements for penalty were not established. The Tribunal found that the respondents' argument that quantum of trades is irrelevant to manipulative intent was insufficient where other essential elements (connection, orchestration, price impact) were absent. The Tribunal therefore treated the limited trading instances and market-price execution as cumulative factors undermining the AO's conclusion of violation warranting penalty. Ratio vs. Obiter: Ratio - Penalty cannot be imposed where the statutory elements of manipulation are not established notwithstanding anonymous screen-based execution; frequency, pricing, volume context and evidentiary links are material to the inquiry. Obiter - Observations that large-scale or repeated patterned matching may still be probative in other factual matrices. Conclusion: The Tribunal held that execution on an anonymous screen at market prices on two days involving disposal of holdings did not, on the facts, justify the monetary penalty under the SEBI Act and PFUTP Regulations; the penalty order against the appellants was quashed. Final disposition linked to issues Because the Respondent failed to establish connections or sufficient indicia of concerted manipulation by the appellants, the Tribunal allowed the appeal, quashed the impugned penalty order as against the appellants, and disposed of pending interlocutory applications without costs.